7.2: Location

Poor Location

The prudent restauranteur considers the location of a restaurant as the ‘connection’ between your target customer and your operating concept. Regarding the actual site selection, some experts indicate that as long as the restaurant is located in the 'right' area of a city with a strong economic component, the actual 'site' is not a primary concern for success. They feel that unique food and beverage offerings, along with good service, will overcome most obstacles and attract customers, even to a location that is not so obvious to consumers. Others on the other hand are not so optimistic. To meet in the middle, regardless the methodology you inherently embrace, it would be safe to say that, at the very least, the restaurant's concept and location must "fit" each other and the restaurant site is an important part of that fit. Over time, it would equally be appropriate to state that as certain things about the trading area and location change, the concept must often change to adapt. A discussion of the important aspects of choosing a 'location' should begin with a look at how bad locations come about.

1. Choosing the most convenient location. Many operators insist on settling for a location that is the most convenient for them thus ignoring the demographics, psychographics, and behavior patterns, or site problems within the marketplace. Many forget that the intention is not to find a site for the restaurant you are looking for the best site available to bridge the consumer and the intended concept. This is what the site must accomplish.
2. Selecting a weak strategic location. Often the selected site offers little strategic advantage to the operation. For example, choosing a location not visible from a major thoroughfare would certainly decrease customer awareness of your operation. Further, you must now market your concept to consumers thereby increasing operating costs incurred from the lack of visibility that would enhance your chances. The problems of such a selection are higher if the trading area is highly competitive.
3. Overlooking the importance of drive-by features. A lack of easy access and visibility can be hard to overcome once the restaurant goes online. When considering the nature of foodservice, it is important to remember that customers need to think of you when hunger set in, additionally, your concept must come to mind when the consumer chooses a location to feel that need. Visibility constantly reinforces your name and operation in the consumers' mind. Easy access must the choice effortless for them. Should they eat here, or battle traffic to reach your out of the way location? Different customers make different decisions. Make it as easy as possible to choose your operation.
4. Choosing a site that can be out-positioned. If it is possible for a major competitor to acquire a location between your operation and the customer, think carefully before selecting that site. In the quick-service or casual segments as examples, location becomes key because there is little consumer loyalty in either segment. Thus if the consumer has trouble reaching your concept, another choice becomes equally viable.
5. Entering the market too late. In any trading area, there is a fine amount of disposable income. Even if consumers in a trading area decided to try your concept, not enough income is available to sustain your operation over time everyone will typically garner a smaller portion of the available 'pie,' Becoming a market niche in ‘sellers’ market’ is inherently far more profitable - and provides a better cushion for negative happenings.
6. No competition in the trading area. Sometimes operations will settle in areas with no competition with the assumption that such a move will instantly provide an advantage only to find out that this is not the case. Typically, a lack of competition in the trading area is an indication of poor market conditions or other consideration that make a site selection in that area a poor decision. An area devoid of foodservice facilities where operations once were is a prime indicator of a declining market. It is always best to explore 'why' no competition exist before one revels in the lack of it. In foodservice, a competitive environment will generally act as a traffic generator for the area pulling consumers toward the area rather than sending then to other parts of the market.
7. Locating in areas primarily occupied by offices. Such areas have large populations during 'business' days only to find the area empty after five o'clock in the evening. While these areas might possibly provide some breakfast or lunch business during the workweek, searching for potential customers on evenings and weekends can become a futile activity. Some organizations are satisfied with breakfast or lunch business but those day parts are not as profitable to a full-service restaurant. Consumers expect lower prices for meals during those day parts. An additional difficulty exists in the attempt to draw customers to the trading area after dark when the area is a ghost town with little drawing power from adjacent areas.
   • Another prime example would be medical offices surrounding a large hospital facility. What appeared to be wonderful opportunities have cripple many a foodservice organization. Doctor's offices and the like generally close early and most hospitals offer foodservice on the premises not to mention time constraints for worker and the arduous task of leaving and returning. In sum, breakfast consumers consider themselves 'late' and lunch consumers are 'in a hurry.' The customer who is transitioning from the happenings of the day with the time to relax and enjoy a full meal is the 'evening' dinner customer. This area lack the consumer most apt to enjoy your offerings and service.
8. Overlooking demographic information. When determining whether, or not, a location connects with the targeted consumer in a trading area, overlooking the market's demographic information can be an insurmountable mistake. If the information suggests that the closest neighbors are not really the lifestyle types who would love to see your concept in their trading area, look to a different location. Those that fail to do so typically do not survive. Thus, before the location search, it is extremely important for foodservice operations to have a clear definition and understanding of who would be attracted to their concept and have the resources to act on that attraction.
9. Selecting quaint out of the way locations. An area with little vehicle or foot traffic is generally problematic if not initially, with certainty over time. Again, visibility reinforces consumer familiarity needed to remain at the forefront of restaurant selection process. Worded differently, the question about such a location that needs consideration from the start is “What will make consumers decide to leave the beaten path to come to our operation?” With the current importance of the two-family income stream limited time, and finite resources, a positive answer from the typical consumer might well be 'occasional' rather than consistent. The occasional choice limits your operation from becoming the 'habit' it needs to be to generate the consistent income need to fund a restaurant operation. At the practical level, how many good employees can you retain when sales are inconsistent or primarily on the weekends? It is not a good idea to situate your operation under such circumstances.
10. Overlooking vehicle patterns. Vehicle patterns can present formidable barriers to the success of your operation. Many a failed restaurant, seeking dinner business, made a location selection on the inbound side of the thoroughfare instead of the traffic flow exiting the area with the much higher customer probability. How would potential customers cross heavy traffic lanes to get to the facility? Traffic lanes where the speed limit is above 45 miles per hour hamper the consumers’ ability to make quick decisions regarding a restaurant selection, or the slowing process to turn into the establishment parking lot. Consumers generally follow the path of least resistance.
11. Failing to do a market study. When one examines the types of decisions made which lead to a restaurant failing, many of the aforementioned issues are a result of the organization failing to do a current and comprehensive market analysis prior to making site decisions. Consumers with the appropriate resources to make the restaurant successful are the highest priority in a market feasibility study. Their psychographic tendencies and behavioral nature are of equal importance in evaluating the restaurants chances for profitability if not its very survival.
    • Over time, many restaurants get off track by failing to maintain 'current' consumer demographic information. In five years, a neighborhood can become unrecognizable. Other businesses will enter the marketplace and some will leave. Consumer preferences will change and a concept fresh and new that is only a few years old can become stale and uninteresting from the customers' perspective. Failing to stay current in terms of information about the marketplace and reacting to that information is one of the primary causes of restaurants failing to maintain consumer appeal. Consumers can have very short memories. An enjoyable visit to a competitor can wipe out almost any trace of your operations existence. After all, the other restaurant is new, fresh, current - more exciting than your concept. Consumers are not shallow. They seek to be enticed, excited, and entertained. If your operation forfeits the ability to accomplish that, another operation will graciously fill your shoes.

Considering the Location

Concept and Location - The Relationship

The proper question: Is it a concept looking for a location, or, a location in search of a concept? In any case, the meanings are similar. The restaurant and the location must complimentary to each other. The physical restaurant represents a concept that threads throughout the furnishings, atmosphere, menu price, seat arrangement and spacing, and the type of service scheme offered. As a location changes its character, parts or all of the conceptual elements in place at that location change as well. A simple foodservice concept such as a hot-dog stand may fit nicely in a shopping center at a given time. However, as other fast food concepts enter the market, the character of the location begins to change. The hot-dog operator may try to extend the menu to compete. As you draw more and more children to that location, an entertainment arcade arrives and now competes for the money children or their parents might have spent on food. In another instance, as sales in a particular casual restaurant fell off, the company changed the place into a more family friendly restaurant featuring hamburgers, peanuts, and entertainment. A Mexican restaurant in an affluent section of Dallas fails. The same location becomes successful as an expensive upscale restaurant. A seafood restaurant in Long Island loses ground and returns to prominence as a Mexican restaurant. This is the path for many operations - concept and location, two sides of the same coin.

What makes a good location for a restaurant?

The answer squarely lies on the desired concept, and the targeted clientele to which it appeals. Does the concept fit the site? Is the location convenient and accessible for the potential clientele in the trading area? A restaurant targeting white and pink-collar professionals for lunch, for example, must be relatively convenient. For other groups of consumers, ‘availability’ drives choice. Auto travelers’ favor roadside restaurants located near Interstate highways as an exemplar. Thus location within a community (rather than on the edge of a city) and near the major highway are plus-factors for tourists traveling through. Further, being a "branded" entity adds to the appeal when the consumers are strangers to the community and are looking for a standard of quality and price. Most travelers know the standards of an Olive Garden or a McDonald's. They are familiar with menu items and pricing, and of additional importance, the sanitation standards of the operations whether it is located in Dallas, Chicago, or New Orleans.

The size of the potential trading area must be large enough to support a particular type of restaurant. A quick service restaurant many need only a population of 10,000 to support it while an upscale gourmet restaurant may require 200,000 to have success. In most instances, a required population within a certain "mile' radius of the operation is considered adequate. In general, the price structure of the restaurant will be one of the major determinants in establishing a restaurant operation within a given market place. For example, the $16.00 to $25.00 menu prices of one type of operation may only appeal to 5 percent of the population while a $8.00 meal for two at a nearby quick service restaurant my appeal to 40% or more of the potential clientele in the market. In reality, neither restaurant actually needs to be near a highway to be successful. The public is more apt to search them out according to tastes and available funds.

The Concept Creates the Location

Normally upscale dining, many forms of casual, and family-style restaurants need not place the same high priority on the convenience of location that, on the other hand, are vital to the success of a coffee shop and most quick service restaurants. In effect, with the right concept, the restaurant itself creates the location if the food service and atmosphere are desirable to consumers. The fact that undesirable locations that have failed as restaurants for as many as ten times in succession then taken over by another operator with a different concept and within a few weeks are again bustling with clientele reinforces this point.

In light of this, developers and community officials are often eager to entice a successful restaurant operator into a new shopping center, areas with stagnant growth, or even those areas that have fallen on hard times. Decaying communities may offer particularly attractive terms to an operator with a proven record of accomplishment. A productive restaurant attracts hundreds of people and can be part of the rejuvenating process for a shopping center, mall, or other area.

A successful restaurant scheme with a colorful personality may often do well in a relatively poor location with regards to its surroundings, its distance from the actual trading area, accessibility issues, and general convenience to the consumers it intends to attract. Of course, it would be equally fair to say that such a restaurant would probably be that much more successful situated in a prime location. Many established restaurateurs consider the usual location factors as being relatively unimportant. They feel, and experience has proven, that people will search out their restaurants. Consequently, they look toward buying failing restaurants located in relatively undesirable locations, remodel them, and utilize a strong marketing plan to build its clientele and bring back the location. Nonetheless, not every case is a success story and while many operators might subscribe to this way of thinking, and equal number or more would state that even with the best location it can be difficult to succeed in the hospitality arena. The restauranteur must understand that prime locations do cost a great deal more thus adding to the operations overhead.

What is the restaurant location worth?

What is the fair price to pay for a restaurant location? The answer to this question actually centers on a balance of two potential values. The first value is the worth placed on the location itself – the real estate value. This value derives from the worth of the surrounding properties or ‘comparable’ prices. Other factors that would add to the real estate worth of a property include improvements or upgrades to the building or grounds, ease of access, and so forth. The real estate value may be greater than the operational value. On the other hand, the lack of such amenities might reduce the worth of a location despite higher comparative prices.

A restaurant location has ‘two’ potential values:

1. Real estate value
2. Value as a profit generator

While a true real estate value calculation is justifiable, the true value of a location to you, the restauranteur, concerns its ability to be a profit generator. A good restaurant operator understands that the real estate value is of little consequence if the site’s ability to fulfill the needs of the operation do not exist. A site lacking profit generation viability truly has no worth to the restaurant operation in this case. Further, the building can detract from the restaurant value if the building has failed as restaurant before, or is unattractive.

The following are some of the important factors to help determine the worth of a location to you.

Real Estate Value

• A potential buyer is concerned with the real estate value; a potential lessee is less so.
• However, an entity wanting to lease a restaurant location must also be concerned with the real estate (or its potential value) because if the value increases, the owner will increase the rent (unless the lease agreement includes a clause to prevent such an increase).

How is the real estate value determined?

1. The value computation involves competitive values in the community.
2. The market value ties to the value set for similar properties in the area.
3. Question – Is the asking price above or below the “market value” for the area?

What affects market value?

• Potential changes in property zoning by local or state zoning boards.
• Will highways or other changes occur in the near future?
• Is the area getting better or worse for a particular kind of restaurant?
• Is the area going on the decline or undergoing revitalization?

As the area changes, the kind of restaurant that will be supported also changes.

• A declining area may need a lower check average restaurant, fast food, or coffee shop.
• As affluence grows, more dinner houses can enter the market.

Why did a restaurant fail in that location?

• Did they not see neighborhood ‘direction’ (growing or declining) correctly?
• Did the preceding firm have a strong well-conceived concept?
• How was their menu development?
• Was the location attractive to that clientele?
• Did they have qualified management and employee practices?
• Was it simply that the areas could not support the restaurant - or a particular concept?

A Detailed Analysis for the Restaurant Location

Seating

• 40 to 50% of all table-service restaurant customers arrive in pairs
• 30% come alone or in parties of 3
• 20% in groups of 4 or more

Space recommendation:

• Luxury or table service - 15 to 20 square feet
• Coffee shops and casual dining – 12 to 17 square feet
• Cafeterias – 10 to 12 square feet
• Counter service – 18 to 26 inches per stool

Site Specification:

• Population requirements
• Residential backup, motels, shopping centers, or office parks
• The area must demonstrate growth and stability
• Easy access and visibility
• Availability of all utilities to the property, including sewer
• Minimum dimensions for the location
• Zoning requirements are conducive to expansion
• Free-standing building
• Free-standing corner location
• Building limitations
• Building regulations applicable to the site
• Mall location
• Heavy vehicular/pedestrian traffic
• Home values and family income levels are average or above
• Minimum income level within 1 mile of the location
• Close to activity generators
• No less than 2 to 3 miles from other existing company locations
• Restaurant competition within 1 mile of the location

Insurance – consult your insurance agent and the fire marshal for all current requirements.

• If leasing or renting – who carries the insurance, the operator or the property owner?
• If it is the property owner – what specifically is covered? Is a copy of the insurance available for inspection? If you have not seen it – it does not exist.
• Does coverage include your inventory as well as the building? The coverage may not include the interior of the building or item contents – always ask about this.
• Is “business interruption insurance” feasible?
• Is current insurance coverage sufficient to replace losses? Inflation and new equipment make it necessary to update insurance coverage periodically to reflect replacement costs.
• Is a sprinkler system in the location? This helps to reduce insurance costs.
• What about construction materials? Are they flammable?
• Does the building have an alarm system, fire extinguishers, and proper exit signage? All of these reduce insurance premiums.

***Department of Health – walk through the property with the health inspector as codes may have changed.

If the build was functioning as a restaurant in the past, the operation may have not made the necessary changes to adhere to current requirements. The new tenant becomes liable for those changes to bring the build up to the current health code. The restauranteur should be aware of any additional expense they may face to make the building suitable in the present. Additional changes or upgrades to the facility are not necessarily unworkable – not knowing you will incur them ‘prior’ to securing the funds to renovate and operate the operation, on the other hand, is unacceptable and dangerous to the success of the business.

Triple Net Lease

This refers to a lease in which the property owner passes on the operator the responsibility for building leasehold improvements, increases in taxes, or increases in insurance. In general, it means that the property owner incurs no further expense beyond his investment after signing the lease. In simple terms: the operator assumes the burden of upkeep, taxes, improvements (replacing old necessary items are improvements) and insurance on the building.

Drawing Up A lease

Begin with a few questions that are important to the operator. Why is the building up for rent or lease? Who were the previous operators? Is it a high crime area? Will highway expansion disrupt the flow of business in the near future? Is there sufficient parking? Is the building in good repair? Is it a bad location? Pests? Are there fire hazards? You should consult with the fire department, police, and health department to confirm all property owner information or to obtain this information.

Clauses that should be included in a lease for a restaurant:

• Names and addresses of the parties – property owner and tenant.
• Period of time the lease is in effect
• Amount of lease payments
• How paid. Rent is payable on the last day of the month, unless there is a clause in the lease requiring advance payment. Negotiate this if necessary
• Occupancy (how many people can occupy the building)? The fire marshal is your confirmation source – not the property owner.
• Facility availability and a specific date.
• Parking (exact amount of space to be available to your operation)
• Equipment included as part of the lease
• Who is responsible for repair or replacement of existing equipment?
• Security deposit return
• An assignment/sublet clause
• Clause stating that the property owner agrees not to withhold unreasonably his consent for the tenant to assign or sublet.
• Condemnation clause – a right to interpose your own claim in condemnation.
• You have the right to operate a restaurant – and/or permission to alter the building.
• Permission to erect a sign (some landlords see this as higher insurance risks)
• Right to paint the building the color you wish
• Wine and liquor licenses, health permit, business permit, fire department permit – there should be a conditional clause stating that ‘the lease will have no effect if any of the above permits are denied. The lease is conditional on obtaining the necessary licenses and permits.’
• An option to renew the lease and the method of computing the rent at the time.
• The have the right to remove equipment and provisions for such movement
• A “no competition” clause in the lease (the property owner cannot rent to other foodservice establishments creating adjacent competition for you).
• A clause, which protects the tenant in case of death or insanity, such as “wife or partner may terminate the lease”.
• Unpleasant odors that cannot be eradicated easily will terminate the lease